M P Evans Regulatory News (MPE)

M.P. EVANS GROUP PLC

M.P. Evans Group PLC ("MP Evans" or "the Group"), a producer of Indonesian palm oil, announces its unaudited interim results for the six months ended 30 June 2018.

highlights

· Strong increase in crop as plantings mature and Bumi Mas enters Group

· 23% increase in crude palm oil production

· 10% reduction in average price of crude palm oil to US$663 per tonne

· Operating profit US$10.7 million, down US$6.9 million of which US$4.1 million unrealised foreign exchange loss

· Oil extraction remains at good levels

· 1,090 hectares of new planting, including smallholders

· Interim dividend of 5.00 pence per share (2017 - 5.00 pence per share)

Commenting on the results, the chairman of M.P. Evans, Peter Hadsley-Chaplin, said: -

"With crops 27% higher in the first half of 2018 than last year, the Group is visibly delivering the expected growth in crops as its young plantings mature and its hectarage continues to increase. Our production costs have fallen, but whilst lower CPO prices meant the increases in crops and production were not matched in the first half of 2018 by an increase in profit, the board is maintaining its interim dividend at 5.00 pence per share."

17 September 2018

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Overview

Profit for the first half of 2018 was US$5.8 million against US$82.4 million for the first half of 2017. The main reason for the difference is that the result for 2017 included a profit of US$68.0 million relating to the disposal of the Agro Muko joint venture. Operating profit in the first half of 2018 was US$10.7 million compared with US$17.6 million in 2017, mostly reflecting an unrealised exchange rate loss as the Indonesian Rupiah weakened against the US Dollar.

A substantial growth in crop led to a 23% increase in production of crude palm oil ("CPO") and an even greater increase in production of palm kernels. However, this underlying increase in production was more than offset by a 10% fall in the commodity price of CPO and that of palm kernels, and an increase in the Group's stocks during the first half of 2018. This contrasted with a reduction in stocks during the equivalent period in 2017. Profit margins from the Group's mills remained at good levels, similar to those in 2017.

Oil-palm fresh fruit bunches ("ffb") on the Group's own areas increased by 27% to 270,700 tonnes, those in the smallholder co-operatives by 40% to 72,400 tonnes. This increase included the contribution of the Bumi Mas project acquired in December 2017. The general increase in crops throughout South East Asia resulted in some pressure on prices. The average price of CPO (cif Rotterdam) was US$663 per tonne during the first half of 2018, US$72 (or 10%) lower than in the same period in 2017.

The Group has continued to implement its strategy to focus on developing and operating majority-held plantations. At the beginning of January 2018, it took operational control of the estates at Bumi Mas acquired at the end of December 2017. The plantings here have excellent potential. However, as can occur, introduction of the Group's management led to some disruption as the workforce was required to adapt to the Group's high agronomic and operating standards. A labour dispute was successfully settled and the estate is being brought up to Group standards. This affected production during the first half of 2018, but crop is projected to rise strongly during the second half of the year. Bumi Mas is expected quickly to contribute to the anticipated acceleration of future growth in Group crops, currently led by its existing young projects in Bangka and at Kota Bangun.

In Musi Rawas, there has been continued good progress with new planting. A total of 980 hectares were planted, 690 of which were for the Group and 290 for the smallholder co-operatives. Planting has reached a conclusion in Bangka. Whilst the Group will continue opportunistically to acquire incidental hectarage, the planting on this project can now be considered complete. Also in Kota Bangun, planting of the Group's original area is all but complete, but here the Group will be able to plant a small additional area recently acquired nearby. In total, during the first half of 2018 the Group newly planted 760 hectares for itself and 330 hectares for smallholder co-operatives. At the end of June 2018, the Group operated 37,800 hectares of oil palm and a further 11,700 hectares on behalf of smallholder co-operatives attached to its projects: a total of 49,500 hectares.

Dividends

The board proposes to pay an interim dividend of 5.00 pence per share. It has previously announced its intention to increase or at least to maintain the level of normal dividends. Hence, barring unforeseen circumstances, shareholders can expect to receive total dividends of at least 17.75 pence per share in respect of the current year. The board believes the anticipated increase in yield from its young plantations, as well as the addition of Bumi Mas, is the basis for sustained future crop and revenue growth.

The palm-oil market

The CPO price (cif Rotterdam) closed the year 2017 at US$674 per tonne. The price then continued to move in a corridor between US$650 and US$700 per tonne for the first quarter of 2018. However, a rebound in production of palm oil in South East Asia and plentiful supply amongst all the world's major vegetable oils led to a weakening of future price expectations. Excepting a rally during the first part of May, the CPO price then fell from US$669 per tonne at the beginning of the second quarter to US$610 per tonne at the end of June. On average, the price of CPO during the first half of 2018 was US$663 per tonne compared with US$735 during the first half of 2017: a 10% fall. Notwithstanding significantly increased production, the low price of CPO and a pronounced discount to soybean oil led to palm-oil stocks falling by some 5% during the period. Since June 2018, the CPO price has further weakened before recovering to around US$560 per tonne.

During the first half of 2018, the price of palm kernels was much lower than during the equivalent period in 2017. This price movement reflects the unusual conditions for palm kernels - low stocks and a shortage of its main competitor, coconut oil - that persisted throughout much of 2017, notably in the early months of that year. The price of palm kernels fell sharply from March 2018 as supplies increased with the burgeoning global ffb crop.

Results for the period

Crops

The acceleration in the Group's crop growth that began in 2017 has continued into 2018, gathering momentum from the first to the second quarter of the year. In the first half, crops from the Group's own estates increased by 19%, in addition to which the Group added, for the first time, crops from Bumi Mas with the result that its own crop increased in total by 27% to 270,700 tonnes compared with 213,800 tonnes in the first half of 2017.

Performance has been strong across the Group's estates (see table below). As well as adding the crop from Bumi Mas, the Group has begun harvesting in its Musi Rawas project in South Sumatra. The only area in which crop has fallen is Simpang Kiri, where the Group is coming to the end of a planned replanting programme. This sacrifices crop in the short term in order to reduce the time to when the Group can benefit from the crop of younger palms from better seeds. The Group does not have a mill at Simpang Kiri, so is freed from the consideration of having to maintain mill throughput during a period of replanting.

As described in the 2017 annual report, a rebound in crop was anticipated in 2018 in the estates at Kota Bangun in East Kalimantan, which had suffered from an unusual combination of conditions in 2017 which were not expected to persist. Crop from these estates increased by 22% compared with the first half of 2017, demonstrating that the final echoes of the 2015-16 El Niño have died away. There is potential to improve on this result. The dramatic increase in crop put pressure on harvesting capacity and the availability of vehicles to transport crop from the field to the mill. The Group plans to construct more bunds (earthen embankments) to protect the estates from the Mahakam river when in flood, and manage the flow of water through the estate from neighbouring higher ground.

Crops in Bangka have continued to rise on the back of excellent rainfall, but this area is prone to intermittent dry spells and so crop here may prove to be more volatile in future than that in the Group's other areas. Crop from Bumi Mas was below potential during the first half of 2018, as the Group took operational control of the estate and began to introduce new operating procedures and new staff and management.

The level of crop from the smallholder co-operatives attached to the Group's projects rose even more strongly than crops in the Group's own areas: the 72,400 tonnes from these areas was 40% ahead of those in 2017. In addition to the increase in crops processed by the Group from its own areas and those of the smallholder co-operatives, the Group was able to maintain the significant volume of ffb bought in from third parties, notably in Bangka. This mill was designed to handle the Group's and smallholder co-operatives' crop at the point these plantings reach peak yield; until then the mill has spare capacity, which is being profitably used by buying in ffb from third parties.

Crop on the Group's 38%-owned associated-company estate, Kerasaan, was 21,600 tonnes during the first half of 2018, similar to that in the previous year.

Production

The Group produced 91,900 tonnes of CPO during the first six months of 2018, 23% higher than the 74,900 tonnes during the equivalent period in 2017. The increase in production lagged that of the increase in crop as a result of slightly lower oil-extraction in the mill in Kota Bangun, which suffered from operational challenges as it sought to process burgeoning crop, notably during the second quarter of 2018. These are being addressed and the mill's performance has started to improve. The Group monitors the performance of its mills against those of mills operating nearby, and the Kota Bangun mill continues to perform at a high level compared with its peers. This now includes its improved rate of kernel extraction. The 23.0% oil-extraction rate at the Bangka mill continues to be of note given the very high proportion of third-party ffb processed during the period, which is of a significantly lower quality than the ffb produced under the Group's control. Unlike in 2017, the timing of dispatches from its bulking facilities meant the Group increased its stock of CPO and palm kernels. As a result, not all production was converted into revenue during the first half of the year.

Whilst the Group does not have its own mill at Simpang Kiri, it has a contract to sell its ffb to a local mill based on the commodity price for CPO and an assumed rate of extraction. To reflect the substance of this arrangement, oil produced from Simpang Kiri's crop has been included in CPO production, and the comparative figure for 2017 has been amended to bring it in line with the new presentation. A similar presentation has been adopted for the early crop in Bumi Mas and Musi Rawas, which is being sold to third-party mills prior to the Group building its own mills in these locations.

Currently, 81% of the Group's production is certified sustainable palm oil. This percentage will rise as the Group constructs its own mills and works with third-party smallholders wanting to supply it with ffb to achieve Roundtable for Sustainable Palm Oil ("RSPO") certification. Before the end of 2023, the Group anticipates that all of its production, other than from Simpang Kiri, will be certified sustainable.

Crops, production and selling-price details for the estates controlled by the Group are as follows:-

Costs

The cost per tonne of palm product (CPO and palm kernels) produced from the Group's estates was US$350, lower than the US$380 in the first half of 2017. The cost of palm product from ffb both supplied by smallholders attached to the Group's projects and bought in from independent smallholders is higher than this since it is pegged to, and so varies with, the commodity price of CPO. Generally, production from areas controlled by the Group is less costly than ffb bought from smallholders, even at the current low level of CPO prices. The reason for this is that, as noted in previous reports, the Group expects unit costs to fall as the young palms on its new projects mature and so crop volume and average bunch weight rise, irrespective of the CPO price. The Group's ability to convert ffb to palm oil and kernels at a diminishing cost per tonne demonstrates its position as an efficient low-cost operator.

Mill-gate price

As noted above in the section 'The palm-oil market', the average cif Rotterdam price for the period was US$663 per tonne, significantly lower than it had been during the first half of 2017. Consequently, during the first half of 2018, the Group actually received on average US$564 per tonne of CPO, US$37 less than in the first half of 2017. During this time, however, the average sustainability premium rose a little from US$5 to US$7 per tonne. For palm kernels, the Group received US$435 per tonne, compared with US$490 in the previous year, reflecting a halving of the premia available for kernels sold with 'sustainability' certificates issued by the RSPO as well as the declining price of palm-kernel oil.

Planting

New planting determines the Group's capacity to produce crop growth in the future. Steady progress has been maintained on planting the Group's project in Musi Rawas. At the end of June 2018, planting since development began reached 6,100 hectares, of which 4,300 were for the Group and 1,800 for the smallholder co-operatives. A further 1,400 hectares were ready for planting and in addition 3,300 hectares had been surveyed, which is a necessary precursor to the land being available for planting. The Group would typically expect more than two-thirds of this last figure eventually to be planted. In Bangka, 110 hectares were planted in the first half bringing planting on this project to a conclusion. In North Sumatra, 260 hectares were replanted.

The situation in respect of planting on behalf of smallholder co-operatives is similar to that of the Group: a total of 330 hectares were planted. Of these, 290 hectares were in Musi Rawas and 40 in Bangka. Altogether, therefore, the Group newly planted 1,090 hectares for itself and its smallholders. In the Group's own areas and in those of its associated smallholder co-operatives, planting is rigorously carried out in compliance with RSPO standards to ensure that it is sustainable.

In Bangka, the Group's smallholder co-operatives have received land lease certificates ('HGUs') for 1,810 hectares.

New land

The Group is exploring the acquisition of additional hectarage close to its existing projects to bring them to an optimal size. The Group's experience is that 10,000 hectares of oil palm with a 60-tonne mill provides a unit which is both big enough to provide economies of scale in production and administration, and small enough to allow the careful scrutiny by field management needed to maintain high standards. The Group's projects in Bangka and Musi Rawas, including smallholder areas, are of this size and the board is actively seeking to extend the Kalimantan project from the current 15,000 hectares to the equivalent of two 10,000-hectare units. More widely, given the relative scarcity of good plantation land, the board remains open to any opportunities that may arise to acquire high-quality developed, or partially-developed, plantations of an optimal size and in a suitable location that meet its operational and sustainability criteria. The Group has zero net gearing and the strength of its balance sheet allows orderly expansion of this kind in line with its strategy.

Gross profit

As a result of the operational outcomes described above, gross profit for the first half of 2018 was US$14.6 million, US$2.6 million lower than the US$17.2 million recorded for the same period in 2017. Profit from continuing operations for the period was US$5.8 million, US$8.5 million lower than that recorded for the first half of 2017. This reduction took account of both a movement in exchange rate loss of US$4.1 million and a deferred-tax write-off of US$2.7 million due to the expiry of historical Indonesian corporate income tax losses.

Associated company: Malaysia

The Group's share of the loss arising in Bertam Properties Sdn. Berhad ("Bertam Properties") was US$0.1 million compared with a profit for the equivalent period in 2017 of US$0.8 million. The result for 2018 reflects a slowdown in the Malaysian property market that predated recent elections. The figure for 2017 has been restated following the adoption of the mandatory accounting standard IFRS15, resulting in an increase of reported profit of US$1.0 million. This arises from recognising the profit from development in stages during construction rather than delaying recognition of the whole profit until a property is sold (see note 3).

CURRENT TRADING AND PROSPECTS

Since the end of June, CPO has largely traded between US$565 and US$595 per tonne. The price was slightly stronger than this in the first two weeks of July and slightly weaker in the last two weeks of August, before reaching a level of US$560 per tonne at the beginning of September. The price in forward markets suggests a gradual increase in price though the remainder of the year.

The Group's crops continue to increase as a result of their young average age and the increasing maturity of the palms on the projects in Bangka and Kalimantan. The average age of the Group's palms is now 7 years. Bumi Mas is already adding to the Group's production and, following resolution of the operational disruption that occurred during the first half of 2018, this contribution is expected to increase. The Group's crops doubled between 2010 and 2016 and, given the young age and size of the Group's planted hectarage, it is anticipated crops will double again between 2016 and 2020.

The increasing maturity of all the Group's newer projects and good progress on planting in South Sumatra provide the basis for considerable future crop growth, and hence rising revenue, even without the acquisition of any further hectarage. The Group anticipates increasing production of certified sustainable palm oil as it completes the development of its new projects. The board remains confident that the fundamentals of the palm-oil market continue to be encouraging. Vegetable oil is a basic foodstuff and increasing demand from a growing world population looks likely to persist. Palm oil delivers by far the highest yield per hectare of all the vegetable oils and has the lowest cost of production. It is therefore well placed, long term, to benefit from the likely future increase in demand.

UNAUDITED CONSOLIDATED INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2018

* restated for the introduction of IFRS15 - see note 3

UNAUDITED CONSOLIDATED BALANCE SHEET

AS AT 30 JUNE 2018

* restated for the introduction of IFRS15 - see note 3

UNAUDITED STATEMENT OF CHANGES IN CONSOLIDATED TOTAL EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2018

* restated for the introduction of IFRS15 - see note 3

UNAUDITED CONSOLIDATED CASH-FLOW STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2018

NOTES TO THE INTERIM STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2018

Note 1 General information

The financial information for the six-month periods ended 30 June 2018 and 2017 has been neither audited nor reviewed by the Group's auditors and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the year ended 31 December 2017 is abridged from the statutory accounts. The 31 December 2017 statutory accounts have been reported on by the Group's auditors, PricewaterhouseCoopers LLP, and have been filed with the Registrar of Companies. The report of the auditors thereon was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006, nor did it contain any matters to which the auditors drew attention without qualifying their audit report.

Note 2 Accounting policies

The consolidated financial results have been prepared in accordance with International Financial Reporting Standards (IFRS and IFRIC interpretations) issued by the International Accounting Standards Board (IASB) as adopted by the EU, and with those parts of the Companies Act 2006 applicable to companies preparing accounts under IFRS.

The accounting policies of the Group follow those set out in the annual financial statements at 31 December 2017, with the exception of the Group's accounting policy for revenue which has been revised from 1 January 2018 upon adoption of IFRS15 'Revenue from contracts with customers'. Further details are given in note 3.

Note 3 Revenue and prior period adjustment

Prior to adoption of IFRS15, the Group's accounting policy was to account for revenue from the sale of crops and produce at the point of delivery. This continues to be the case following the adoption of the new standard.

The Group's accounting policy for recognising revenue, and therefore its share of profit, from its property associate, has been updated. Previously, revenue from construction contracts on developed property was recognised at full completion of a sale. From 1 January 2018, this continues to be the case for commercial properties. However, in accordance with the five-step model in IFRS15, for certain residential properties revenue is recognised proportionately over the contract period. A prior period adjustment has been made to reflect this change in accounting policy using the retrospective method. The impact of the change has been to increase the Group's investment in associates and associated reserves at 1 January 2017 by US$2.4 million, and increase the Group's share of associated companies' profit after tax by US$1.0 million and US$0.6 million for the periods ending 30 June 2017 and 31 December 2017 respectively. The corresponding increases in basic earnings per share were 1.9c and 1.1c. Opening reserves at 1 January 2018 have increased by US$3.0 million.

Note 4 Segment information

The Group's reportable segments are distinguished by location and product: palm oil plantation crops in Indonesia and property development in Malaysia

* restated for the introduction of IFRS15 - see note 3

Note 5 Dividends

Subsequent to 30 June 2018, the board has declared an interim dividend of 5.00 p per 10p share. The dividend will be paid on or after 2 November 2018 to those shareholders on the register at the close of business on 19 October 2018.

Note 6 Acquisition of subsidiary

On 22 December 2017, the Group acquired 100% of Sunrich Plantations Pte Ltd ("Sunrich"), which in turn owns 95% of the issued share capital of PT Bumi Mas Agro. Provisional fair values were recognised in the 2017 annual report in respect of the identifiable assets acquired and liabilities assumed. These provisional amounts have since been updated as set out in the table below:

Whilst the total amount allocated as payment for the equity of Sunrich reduced by US$6.5 million, the total consideration for the purchase did not change as there was a corresponding increase in the amount allocated to settle loans from the former shareholders.

Note 7 Share capital

During the period, as a result of the exercise of share options, the Company issued 75,000 10p shares for US$159,000 cash consideration. In addition, the Company bought back and cancelled 174,464 10p shares for a total cost of US$1,790,000.

Note 8 Analysis of movements in cash flow

Note 9 Discontinued operations

On 17 March 2017, the Group completed the sale of its 36.84% interest in PT Agro Muko. Total sale proceeds were US$99.8 million, and the Group recorded a profit on disposal of US$66.4 million.

Note 10 Exchange rates